America’s Has-Been Economy

Chronicles ^ | Friday, March 18, 2005 | Paul Craig Roberts

[A. Pole]

A country cannot be a superpower without a high-tech economy, and America’s high-tech economy is eroding as I write.

The erosion began when U.S. corporations outsourced manufacturing. Today, many U.S. companies are little more than a brand name selling goods made in Asia.

Corporate outsourcers and their apologists presented the loss of manufacturing capability as a positive development. Manufacturing, they said, was the "old economy," whose loss to Asia ensured Americans lower consumer prices and greater shareholder returns. The American future was in the "new economy" of high-tech knowledge jobs.

This assertion became an article of faith. Few considered how a country could maintain a technological lead when it did not manufacture.

So far in the 21st century, there is scant sign of the American "new economy." The promised knowledge-based jobs have not appeared. To the contrary, the Bureau of Labor Statistics reports a net loss of 221,000 jobs in six major engineering job classifications.

Today, many computer, electrical and electronics engineers, who were well paid at the end of the 20th century, are unemployed and cannot find work. A country that doesn’t manufacture doesn’t need as many engineers, and much of the work that remains is being outsourced or filled with cheaper foreigners brought into the country on H-lb and L-1 work visas.

Confronted with inconvenient facts, outsourcing’s apologists moved to the next level of fantasy. Many technical and engineering jobs, they said, have become "commodity jobs," routine work that can be performed cheaper offshore. America will stay in the lead, they promised, because it will keep the research and development work, and be responsible for design and innovation.

Alas, now it is design and innovation that are being outsourced. Business Week reports ("Outsourcing Innovation," March 21) that the pledge of First World corporations to keep research and development in-house "is now passe."

Corporations such as Dell, Motorola and Philips, which are regarded as manufacturers based in proprietary design and core intellectual property originating in R&D departments, now put their brand names on complete products that are designed, engineered and manufactured in Asia by "original-design manufacturers" (ODM).

Business Week reports that practically overnight large percentages of cell phones, notebook PCs, digital cameras, MP3 players and personal digital assistants are produced by original-design manufacturers. Business Week quotes an executive of a Taiwanese ODM: "Customers used to participate in design two or three years back. But starting last year, many just take our product."

Another offshore ODM executive says: "What has changed is that more customers need us to design the whole product. It’s now difficult to get good ideas from our customers. We have to innovate ourselves." Another says: "We know this kind of product category a lot better than our customers do. We have the capability to integrate all the latest technologies." The customers are America’s premier high-tech names.

The design and engineering teams of Asian ODMs are expanding rapidly, while those of major U.S. corporations are shrinking. Business Week reports that R&D budgets at such technology companies as Hewlett Packard, Cisco, Motorola, Lucent Technologies, Ericsson and Nokia are being scaled back.

Outsourcing is rapidly converting U.S. corporations into a brand name with a sales force selling foreign designed, engineered and manufactured goods. Whether or not they realize it, U.S. corporations have written off the U.S. consumer market. People who do not participate in the innovation, design, engineering and manufacture of the products that they consume lack the incomes to support the sales infrastructure of the job diverse "old economy."

"Free market" economists and U.S. politicians are blind to the rapid transformation of America into a third world economy, but college-bound American students and heads of engineering schools are acutely aware of declining career opportunities and enrollments. While "free trade" economists and corporate publicists prattle on about America’s glorious future, heads of prestigious engineering schools ponder the future of engineering education in America.

Once U.S. firms complete their loss of proprietary architecture, how much intrinsic value resides in a brand name? What is to keep the all-powerful ODMs from undercutting the American brand names?

The outsourcing of manufacturing, design and innovation has dire consequences for U.S. higher education. The advantages of a college degree are erased when the only source of employment is domestic nontradable services.

According to the March 11 Los Angeles Times, the percentage of college graduates among the long-term chronically unemployed has risen sharply in the 21st century. The U.S. Department of Labor reported in March that 373,000 discouraged college graduates dropped out of the labor force in February—a far higher number than the number of new jobs created.

The disappearing U.S. economy can also be seen in the exploding trade deficit. As more employment is shifted offshore, goods and services formerly produced domestically become imports. No-think economists and Bush administration officials claim that America’s increasing dependence on imported goods and services is evidence of the strength of the U.S. economy and its role as engine of global growth.

This claim ignores that the United States is paying for its outsourced goods and services by transferring its wealth and future income streams to foreigners. Foreigners have acquired $3.6 trillion of U.S. assets since 1990 as a result of U.S. trade deficits.

Foreigners have a surfeit of dollar assets. For the past three years, their increasing unwillingness to acquire more dollars has resulted in a marked decline in the dollar’s value in relation to gold and tradable currencies.

Recently, the Japanese, Chinese and Koreans have expressed their concerns. According to a March 10 Bloomberg report, Japan’s unrealized losses on its dollar reserve holdings have reached $109.6 billion.

The Asia Times reported on March 12 that Asian central banks have been reducing their dollar holdings in favor of regional currencies for the past three years. A study by the Bank of International Settlements concluded that the ratio of dollar reserves held in Asia declined from 81 percent in the third quarter of 2001 to 67 percent in September 2004. India reduced its dollar holdings from 68 percent of total reserves to 43 percent. China reduced its dollar holdings from 83 percent to 68 percent.

The U.S. dollar will not be able to maintain its role as world reserve currency when it is being abandoned by that area of the world that is rapidly becoming the manufacturing, engineering and innovation powerhouse.

Misled by propagandistic "free trade" claims, Americans will be at a loss to understand the increasing career frustrations of the college educated. Falling pay and rising prices of foreign made goods will squeeze U.S. living standards as the declining dollar heralds America’s descent into a has-been economy.

Meanwhile, the Grand Old Party has passed a bankruptcy "reform" that is certain to turn unemployed Americans living on debt and beset with unpayable medical bills into the indentured servants of credit card companies. The steely-faced Bush administration is making certain that Americans will experience to the full their country’s fall.

To find out more about Paul Craig Roberts, and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate web page at www.creators.com.

COPYRIGHT 2005 CREATORS SYNDICATE, INC.

[William Terrell]

Only a protectionist "nut" (your term) fails to see the economic benefits of a manufacturing plant in their own backyard.

Only a "free trade" nut fails to see the danger of dependence on foreign production and the loss of American manufacturing.

Give me one good reason for world trade, to the extent we are involved in it, over making what people need domestically and selling to each other in this country. Justify your reason as a greater boon to American (only American, I could care less about others) economic health against the already experienced economic health of the 20th century decades where we practiced the latter.

[sanchez810]

Another rant against the Free-market economy, I thought the discussion ended when the Berlin wall fell.

[A. Pole]

1rudeboy:

Engineering graduates are the most highly paid graduates in the U.S. Sorry you're not satisfied.

chimera:

Of the recent graduates in my department, 75% of them went home after graduation, to Turkey, India, China, Romania, etc. Of the U.S. graduates, one went to law school, three enrolled in MBA programs, one got a job as a security guard at a local car sales lot, one went to work in his father's machine shop, and the most highly-paid U.S. graduate went to work for, you guessed it, the government, as a patent examiner. None of the U.S. graduates are working in the areas they were trained in.

I don't know, call it anecdotal if you want, but at one time when this country was a leader in manufacturing and technological innovation, people who could work in R&D were highly sought-after individuals. Employers would beat a path to the door of the best and brightest of our young scientists, who were more than eager to take on the challenge. With the departure of those manufacturing and technology industries to foreign shores, the R&D functions have withered away here.

Nowadays, I see in the classroom every day, among the sea of foreign nationals (who are, by and large, very fine individuals, obviously valued by their governments and societies), those few U.S. students who, while capable, are quite despondent and pessimistic about their chances for a long-term career in their chosen fields, and are almost resigned to being a kind of wandering gypsy in their careers if they hope to have any kind of work doing what they are trained to do. That kind of lifestyle is fine if you're young and footloose and fancy free, but is hell on family life and putting down any kind of roots and building a decent life for you and your loved ones.

Good answer!

[A. Pole]

Another rant against the Free-market economy, I thought the discussion ended when the Berlin wall fell.

Which way did it end? Marx was all for the free trade.

[durasell]

Chicago, NY, Silicon Valley etc., someplace where there are still a few high tech jobs.

[America's Resolve]

For the 20 years of experience in IT it hasn't been a problem, suddenly it's a problem.

No. The problem isn't rural Iowa. The problem is that I haven't been working for $5/hr that someone in Bombay works for. There's always cheaper, but not necessarily better. That's where all of our wages are heading if this trend continues.

I live in rural Iowa, but I travel to the job. I've worked in Iowa, Nebraska, Illinois, Kansas, Georgia, Virginia and DC. The problem isn't the location, the problem is that the jobs have disappeared.

The whole psychology of outsourcing is that American workers should be working at the lowest wage that can be found anywhre in the world. If American IT people worked for $10/hr, outsourcing would still be happening because companies bottom lines would still look better if they were working at $5/hr so jobs would still be shipped out.

Don't kid yourself. Outsourcing is about $$$. Nothing else.

[1rudeboy]

So why do protectionists cite to Marx?

[A. Pole]

So why do protectionists cite to Marx?

What are you talking about?

[1rudeboy]

To hell with such "progress" which is changing USA into Latin America or XIX England.
A. Pole, reply #138.

It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution.
Karl Marx, 1848.

[A. Pole]

It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution. Karl Marx, 1848.

And you support it?

[1rudeboy]

Support what?

[KC_Conspirator]

The old free trade arguement, where no commodities or goods are trade, but the American jobs by the thousands are sent someplace where they don't have to pay the cost of healthcare - just to benefit the oligarchy. So civilized!

[A. Pole]

Support what?

This what Marx wanted as prerequisite for the revolution - free trade:

"It breaks up old nationalities and pushes the antagonism of the proletariat and the bourgeoisie to the extreme point. In a word, the free trade system hastens the social revolution. Karl Marx, 1848."

[1rudeboy]

Did you see me arguing for social revolution? Who is more likely to argue that "free trade" creates conflict between haves and have-nots? A "free-trader," or a "protectionist?"

[<1/1,000,000th%]

"Ultra-cheap" labor can't interpret technical documents. It can't improvise if a process is not working. It can't communicate with R&D. And toys are certainly not a technology.

And try to work on any technology with someone who doesn't speak English. Immigrants are flocking to the US for technical manufacturing jobs because the US school system keeps turning out punks who read at a 4th grade level and think the US never landed on the moon, but UFO's are alien space ships that need crop circles to navigate.

[dervish]

"A run amok pure capitalist system is not in everyone's interest; they caused unions to rise and socialism to become attractive. Common sense with a touch of what is best for the common good needs to be also understood by our corporate titans. Otherwise, the short-sighted mentality of what the next quarters earnings report will look like (at any cost) vs. what's the long-term objectives of the company is in relation to the society/country/world it serves, becomes suspect."

I trust the long term thinking of a Corporation which seeks to exist beyond the next election cycle more than the Congress with a built in term expiration.

"a touch of what is best for the common good"

So you are advocating doing the work of Unions and Socialism now to spare us from it later?

[A. Pole]

Who is more likely to argue that "free trade" creates conflict between haves and have-nots? A "free-trader," or a "protectionist?"

The second of course, or third - a revolutionary who supports free trade in order to achieve his goal.

[Toddsterpatriot]

So you are advocating doing the work of Unions and Socialism now to spare us from it later?

This seems to be a common theme among protectionists. One of my favorite, Willie Green, made a similar argument for steel tariffs. I'll summarize:
Cheap foreign steel is bad for America. It will drive more expensive US steel makers under. Foreigners will then raise steel prices. Expensive steel is bad for the US economy. So, to protect us from expensive steel on some future date, we must make steel expensive today.

It's some sort of myopia. If you follow their argument (I'm being generous) to it's logical conclusion, they contradict themselves.

[1rudeboy]

Don't forget the corollary: cheap steel is bad because our mills are going under--protectionism is the answer, and expensive steel is bad because the Chinese consume too much--protectionism is the answer.

[dervish]

"USA industry cannot compete against countries with VAT, national health care and full student scholarships."

Are you delusional? Europe is sinking and we are swimming. Why would we imitate that?

http://www.timbro.com/euvsusa/